What is an Allowance?
An allowance is a fixed amount of money paid to employees by their employer to cover specific
expenses or as additional compensation over their basic salary.
FULL TAXABLE ALLOWANCE
These allowances are fully added to the salary and taxed as per the applicable income tax slab.
Examples include:
1. Dearness Allowance (DA) – Given to compensate for inflation.
2. Overtime Allowance – Paid for extra working hours.
3. City Compensatory Allowance (CCA) – Given for employees working in expensive cities.
4. Tiffin/Meals Allowance – If given as a fixed sum and not reimbursed.
5. Interim Allowance – Given before final salary revision.
6. Project Allowance – Given to employees for project-related expenses.
7. Warden Allowance – Given to employees working as hostel wardens.
8. Non-Practicing Allowance (NPA) – Given to government doctors, medical professionals,
etc.
9. Cash Handling Allowance – Given to employees handling cash transactions (like bank
employees, cashiers).
10. Servant Allowance – Given to cover the cost of personal servants.
11. Entertainment Allowance – Given to employees for hosting official guests (fully taxable
for private employees but partially exempt for government employees).
12. Marriage Gift Allowance, medical allowance, Family Allowance – If given in cash, it is
fully taxable.
13. Transport Allowance- For Office to home and home to office trave. It is Full Taxable
PARTIALLY TAXABLE ALLOWANCES
These allowances have a specific exemption limit under Section 10 of the Income Tax Act,
beyond which the remaining amount is taxable. Examples include:
• House Rent Allowance (HRA) – Exempt under Section 10(13A), subject to conditions.
HRA Exemption Calculation
The least of the following three amounts is exempt from tax, and the remaining HRA is
taxable:
1. Actual HRA received from the employer.
2. Rent paid minus 10% of salary (Salary = Basic Salary + Dearness Allowance + %
Commission On Turnover Basis).
3. 50% of salary if residing in a metro city (Delhi, Mumbai, Kolkata, Chennai) OR 40% of
salary for non-metro cities.
Note: If you do not pay rent, the entire HRA received is fully taxable.
Example Calculation
Suppose an employee receives the following:
• Basic Salary = ₹50,000 per month (₹6,00,000 per year)
• HRA Received = ₹20,000 per month (₹2,40,000 per year)
• Rent Paid = ₹15,000 per month (₹1,80,000 per year)
• Location = Delhi (Metro City)
Step-by-Step Calculation
Three exemption values:
1. HRA received: ₹2,40,000
2. Rent paid – 10% of salary: (₹1,80,000 – ₹60,000) = ₹1,20,000
3. 50% of salary (metro city): 50% of ₹6,00,000 = ₹3,00,000
Least of the three: ₹1,20,000 (exempt from tax)
Taxable HRA = HRA received – Exempt HRA
= ₹2,40,000 – ₹1,20,000
= ₹1,20,000 (Taxable HRA)
• Entertainment Allowance---Entertainment Allowance is given to employees to cover
expenses related to hospitality, guest entertainment, or official gatherings.
Taxability
For Government Employees – Partially Exempt under Section 16(ii) of the Income Tax
Act.
For Private Sector Employees – Fully Taxable (No exemption allowed).
Entertainment Allowance Exemption for Government Employees
The least of the following is allowed as a deduction from salary:
1. Actual Entertainment Allowance received.
2. 20% of Basic Salary (excluding any other allowances, DA, or benefits).
3. ₹5,000 per year (maximum limit).
Note: The exemption is allowed only to government employees (central or state
government). Employees of private companies, PSUs, or local authorities do not get this
exemption.
Example Calculation (For Government Employee)
Suppose a government employee gets:
• Basic Salary = ₹30,000 per month (₹3,60,000 per year)
• Entertainment Allowance = ₹2,000 per month (₹24,000 per year)
Three exemption values:
1. Actual EA received: ₹24,000
2. 20% of Basic Salary: 20% of ₹3,60,000 = ₹72,000
3. Maximum limit: ₹5,000
Least of the three = ₹5,000 (Exempt)
Taxable Entertainment Allowance
= ₹24,000 – ₹5,000
= ₹19,000 (Taxable Allowance)
SPECIAL ALLOWANCES FOR OFFICIAL DUTY
These allowances are not taxable if spent on official duties. If not fully spent, the unused
portion is taxable. Examples:
• Conveyance Allowance – Given for official travel.
• Daily Allowance – Given when an employee travels for work.
• Uniform Allowance – To cover the cost of uniforms required for duty.
• Helper Allowance – For hiring a helper for official work.
• Tour Travelling Allowance – Covers travel expenses for official duty.
NOTIFIED EXEMPTION ALLOWANCE
1. Foreign Allowance – Given to government employees posted abroad full exempt
2. United Nations Allowance – Given to UN employees full exempt
3. High Altitude Allowance – Up to ₹1,060/month for armed forces personnel.
4. Island Duty Allowance – Up to ₹3,250/month for armed forces on remote islands.
5. Compensatory Field Area Allowance – Up to ₹2,600/month for armed forces.
6. Compensatory Modified Field Area Allowance – Up to ₹1,000/month for armed forces.
7. Tribal Area Allowance – Up to ₹200/month for employees in notified tribal areas.
8. Allowance for Judges of High Court/Supreme Court – Fully exempt.
9. Allowances for MPs/MLAs – Fully exempt (except daily allowance).
10. Children Education Allowance – ₹100 per child per month (max 2 children).
11. Hostel Expenditure Allowance – ₹300 per child per month (max 2 children).
12. Transport Allowance for Disabled Employees – ₹3,200 per month.
13. Border Area Allowance – ₹200 – ₹1,300 per month (based on location).
14. Underground Allowance (Mines Workers) – Up to ₹800 per month.
15. Hill Area/Climate Allowance – ₹300 – ₹7,000 per month depending on the area.
